Dripping Tap Co currently has idle plant capacity and wishes to make as large a profit as possible.It could use some of its facilities to produce 10 000 units of a new product that could be sold through its existing sales network.The new product would have the following $$\begin{array} { l c }
\text { 1. estimated costs: } & \text { Per unit } \
\text { Materials } & \$ 8 \
\text { Labour } & 12 \
\text { Variable factory overhead } & 5 \
\text { Variable selling \& administrative costs } & 1
\end{array}$$ Assume the fixed factory overhead for the plant is $10 000 per month and the fixed selling and administrative costs are $2000 per month.What is the minimum price that the firm could charge for this product without reducing overall profits?

Question

Dripping Tap Co currently has idle plant capacity and wishes to make as large a profit as possible.It could use some of its facilities to produce 10 000 units of a new product that could be sold through its existing sales network.The new product would have the following $$\begin{array} { l c } 
\text { 1. estimated costs: } & \text { Per unit } \
\text { Materials } & \$ 8 \
\text { Labour } & 12 \
\text { Variable factory overhead } & 5 \
\text { Variable selling \& administrative costs } & 1
\end{array}$$ Assume the fixed factory overhead for the plant is $10 000 per month and the fixed selling and administrative costs are $2000 per month.What is the minimum price that the firm could charge for this product without reducing overall profits?

Quizplus · Accepted Answer

The minimum price should cover all variable costs and fixed costs. Total variable cost per unit is $26 ($8 + $12 + $5 + $1). Fixed costs are $12,000 per month ($10,000 + $2,000), which are already covered by existing operations. Therefore, the minimum price to avoid reducing profits is $26.

Dripping Tap Co Currently Has Idle Plant Capacity and Wishes